The U.S. Department of Justice (DoJ) is reportedly investigating Supermicro after Hindenburg Research accused the company of manipulating its financial reports and violations of U.S. export regulations to Russia and China, reports the Wall Street Journal. Supermicro has denied any wrongdoing, but the investigation is in its early stages, and stock prices have dropped in response. The DoJ and Supermicro have not formally confirmed the ongoing probe.
DoJ reportedly probes Supermicro
Hindenburg Research published a report titled Supermicro: Fresh Evidence Of Accounting Manipulation, Sibling Self-Dealing And Sanctions Evasion At This AI High Flyer back in August. The report accused Supermicro of improper accounting practices, related-party transactions, and failure to comply with U.S. export regulations. Supermicro is accused of selling high-tech products to China and Russia. This is after Russia invaded Ukraine in early 2022 and follows strict U.S.-imposed export controls on high-performance processors bound for China. The Hindenburg investigation appears comprehensive — the short seller investor says it lasted three months and included interviews with former Supermicro employees.
Following Hindenburg's report, Supermicro postponed filing its annual report, stating that it needed to review its internal financial controls, which raised suspicions. Now, the Department of Justice has started its own inquiry into the company, focusing on allegations of financial misconduct. According to the report, a prosecutor contacted individuals with potential knowledge of these practices, including information about a former employee who accused Supermicro of violating accounting rules.
Dealing with Russia
Following the Russian invasion of Ukraine in 2022, the U.S. implemented strict export restrictions on high-performance computers and related technology to Russia. As a result, approximately 46 companies involved in handling these products are now under U.S. sanctions, with two-thirds of these exports consisting of components deemed critical by the U.S. government, potentially intended for military use.
Despite Supermicro's claims of halting sales and recording no revenue from Russia since the war began, the company's exports to Russia have surged threefold, according to Hindenburg's findings.
One significant recipient of Supermicro products is Niagara Computers, a supplier linked to a major Russian supercomputer used at a previously secret and now-sanctioned Kurchatov Institute nuclear technology research center. Niagara Computers received $46.3 million in products since the start of the war. Allegedly, these sales were initially facilitated through a California-based distributor but were later funneled through three new Turkish shell companies, one of which was sanctioned for smuggling.
Additionally, around $30 million in components were allegedly shipped through a Hong Kong-based shell entity to VneshEcoStyle, one of Russia's largest importers of dual-use technology, which is also now under sanctions. This company makes no secret that its business is to 'find the equipment abroad and to deliver it in Russia,' which essentially means evading sanctions.
Trading with China
As the U.S. government has been cracking down on technology sales to China and Supermicro has come under scrutiny, the company's business practices to supply technology to Tianxia purportedly become more sophisticated.
Hindenburg Research's report alleges that Supermicro exported AI, HPC, and surveillance servers equipped with Nvidia processors to China, even to entities with ties to the Chinese military through resellers.
The report suggests that Supermicro employed intermediaries (for example, using Taiwan-based Leadtek, which derives about 70% - 80% of its revenue from China) and shell companies to obscure the final destinations of its products, thus evading U.S. export control regulations. It alleges that this practice enabled Supermicro to bypass restrictions and continue business in China despite tightening export laws.
The report suggests that these actions demonstrate systemic governance failures within Supermicro and a willingness to circumvent trade restrictions to boost revenue and profits. This, of course, raises geopolitical concerns about the role of U.S. companies in advancing the technological capacity of strategic rivals. Hindenburg suggests that Supermicro potentially risked violating U.S. laws designed to prevent sensitive technologies from aiding foreign militaries. However, the report provides no direct evidence of Supermicro selling restricted components (Nvidia's A100 or H100 processors) to China.
Stock drops
Supermicro has benefited greatly from the rise of artificial intelligence, with its market value soaring from $4.4 billion in recent years to $67 billion by March 2024. The company is a major supplier of AI servers, which has driven much of its recent success.
Despite Supermicro's growth, the report has cast doubt on its business practices. Apparently, just selling AI servers to interested parties was not enough. Based on Hindenburg's research, the company sold its servers to entities possibly linked to China and Russia's military amid the war against Ukraine, in which China aids Russia with technology.
Supermicro's stock dropped by 12% after news of the DOJ investigation became public due to the WSJ report. The AI stock boom, which had significantly boosted the company's valuation, has cooled recently as investors adjust their expectations regarding returns on AI investments. However, when it comes to Supermicro, the company's financial results were allegedly boosted by illegal business practices and supplying U.S. adversaries.
